Recently our UMB Investment Management team shared their insights and analysis on current economic and market conditions. (Fall 2018)

This quarter’s theme is “All-Time Highs.” As the stock market hits record levels, new volatility has emerged. During this webinar we discuss market volatility, take look at the the economic evidence for all-time highs, what’s not at all-time highs and how politics may factor into all of this. Finally, we provide our forecast based on the fundamentals of the U.S. economy. An overview of the webinar is also included below.

All-time highs

The S&P 500 hit an all-time high in 3Q, supported by several economic data points that were also close to, or at, all-time highs. With that in mind, our theme for the quarter is “All-Time Highs.” The U.S. economy is in transition, the underlying fundamentals remain intact, 2Q gross domestic product (GDP) posted a 4.2 percent gain and 3Q GDP is expected to be better than 3 percent. The volatility in the stock market, a leading indicator, suggests there are many headwinds that will eventually cause economic activity to slow. A trade spat with China, slowing global growth, a tight labor market and higher interest rates all are weighing on economic activity.

Labor market

The slack in the labor market is abating. The unemployment rate stands at 3.7 percent—not an all-time low, but the lowest unemployment rate since 1969. Initial unemployment claims have dropped to a low of 205,000 in 3Q, which is the lowest reading since the 1960s. This data point is a reliable indicator that the unemployment rate will remain low well into 2019. We expect unemployment to be 3.8 percent at the end of 2018 and in the 3.5-3.8 percent range by the end of 2019.

The labor market is getting tight, with 7.1 million job openings and only 5.9 million unemployed people to fill those jobs. This is leading to wage inflation. Average hourly earnings are up 2.7 percent, yet our surveys suggest wage inflation is significantly higher than that. This data will support the Federal Reserve’s (Fed) plan of moving short-term interest rates higher.

Consumer confidence

Consumer confidence is close to an all-time high and when consumers feel good, they spend. This is likely to lead to a strong holiday shopping season in 4Q. The labor market, wage growth, asset prices and fiscal stimulus all support robust consumer and business confidence. Businesses feel good because of tax reform and deregulation, which have caused optimism to reach near record levels. As the boost from fiscal stimulus wanes, higher interest rates increase costs, and wage growth and tariffs increase inflation, CEO confidence may fade.

Trade negotiation progress

A new deal with Mexico and Canada (USMCA) was reached at the end of the quarter to replace NAFTA. However, tensions with China have escalated. We think there is a chance for progress when President Donald Trump and China’s President Xi Jinping meet at the upcoming G20 meeting in late November.

Outlook

We expect GDP growth of 3.2 percent in 3Q, 2.5 percent in 4Q, and 2.9 percent total for 2018. We think the risk is likely to the upside of our forecasts. In fact, two of the three Fed GDP tracking models we follow are signaling GDP at more than 4 percent in Q3.

We expect GDP to slow somewhat to 2.3 percent-2.7 percent in 2019, as the benefit of the fiscal stimulus starts to wane and it gets increasingly difficult for businesses to find qualified workers, which could begin to slow the pace of job gains. We expect the Fed to increase rates to at least 3 percent in 2019. Corporate earnings should see positive growth and we expect stock prices up 5-10 percent in 2019.

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